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Why Politicians Lose So Much Money Trying To Pick Winners

The Solyndra scandal offers us a reminder that government isn’t very good at picking winners and shouldn’t try to do it. Thanks to Obama administration connections, this California‑based solar panel maker had a $535 million spending blowout at the taxpayers’ expense, then fired everybody – some 1,100 jobs. But there continues to be relentless lobbying for government to back other ventures touted as essential for our future.

Perhaps we need to reflect a little on why government hasn’t been able to pick winners. For starters, nobody has a crystal ball. Media reports of official government news releases regularly describe as “unexpected” the latest numbers on unemployment, housing starts, the gross domestic product and other economic indicators. Financial bubbles, stock crashes, bond defaults, terrorist attacks, world wars, natural disasters, rising prices, falling prices and so much else have taken politicians by surprise.

It can be just as difficult to predict all sorts of things in our lives, like which new car models will be successful. Every year for decades, automakers have introduced new models. There have been hundreds and hundreds, but most weren’t in production very long.

Although a business might develop a winning product, it’s likely to have trouble as consumer tastes change, as the business environment changes, as competitors arise more quickly, develop better products, cut prices and so on. The computer industry is littered with the wreckage of businesses that failed to continue making the right moves fast enough and were ultimately acquired or shuttered — like Compaq, Kaypro, Microdata, Mostek, Osborne, Wang, Control Data, Data General, Digital Equipment, Remington Rand and Tandem Computer, among others.

Being a winner with one technology doesn’t mean a business will be a winner with the next technology. In part, this is because businesses have incentives to continue squeezing more revenue from old technologies they invested in. By contrast, new businesses have everything to gain from their new technologies and nothing to lose from the demise of old technologies they never invested in.

During the 1940s, for example, the leading makers of vacuum tubes were Sylvania, Raytheon and RCA, which seemed most likely to dominate the next technological revolution. But it turned out to be germanium transistors manufactured by Texas Instruments, a firm that had started in an entirely different industry – oil exploration. Texas Instruments’ first transistors reached the market in 1952, and the company seemed to be riding the wave of the future, but along came Intel that hit the jackpot with microprocessors and random access memory chips.

If business is challenging when entrepreneurs make decisions for sound business reasons, it’s doomed when politicians become involved, because they make decisions for political reasons. Politicians like to pay off big campaign contributors by steering government contracts their way, regardless of how dubious the campaign contributors might be as business executives.

Politicians want projects they can brag about during an election campaign, whether or not the projects make business sense. Politicians demand that projects be located in their districts or states, even when such locations create problems like higher costs.

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First, the program was authorized under Title XVII of the Energy Policy Act of 2005 (Pub.L. 109-58), a bill (HR 6) introduced by two conservative Republicans, Richard Pombo [R-CA11] and William Thomas [R-CA22]. It passed the Republican controlled House 249 to 183 and passed the Republican controlled senate 85 to 12, which is to say, with the support of the majority of the Republican Caucus. None other than George W. Bush signed the bill into law. In October of 2007 Secretary of Energy Samuel W. Bodman released the regulations to enable this law. At the press conference DOE…”invited 16 project sponsors, who submitted pre-applications last Fall, to submit full applications for loan guarantees”. Who was included in that invitation? “Solyndra, Inc. California is the proposed location for this project, which plans to manufacture highly efficient thin-film photovoltaic modules.” (1)

So it was the champions of the Free Market, conservative Republicans who devised the entire loan program. I guess that they were in favor picking winners in the market place before they were against it.

Second, the faceless bureaucrats of the DOE accurately identified that the proposed loan was a bad idea. They correctly argued that:

“The issue of working capital remains unresolved,” the Energy Department staffer noted that August, according to a summary provided as part of Wednesday’s congressional hearing. “The issue is cash balances, not cost. [Solyndra] seems to agree that the model runs out of cash in Sept. 2011 even in the base case without any stress. This is a liquidity issue.”

The employee then asked, “How can we advance a project that hasn’t funded working capital requirements and that generates a working capital shortfall of $50 [million] when working capital assumptions are entered into the model?” (2)

So in fact, it is possible to identify the “winners” using sound business principles and established methods, even by bureaucrats. This is exactly why politicians establish systems that are no political but operated by specialists capable of doing the job.

Your first argument is simply tu quoque, and not at all relevant to the issue of whether government is good at picking winners. The article did not say “Democrat government”; it said “government”, tout court.

Your second argument actually makes Powell’s case. Even with information available to them about the high risk, the government proceeded to pour money into the politically-connected enterprise. The issue is not whether some wonk in the belly of DOE can compute the cash burn rate of a company; it is whether government makes use of that knowledge. Manifestly, the government did not.

1) I have to disagree, Mr. Powell did indeed tie the issue of Solyndra to the current Democratic administration.

Mr. Powell wrote:”The Solyndra scandal offers us a reminder that government isn’t very good at picking winners and shouldn’t try to do it. *Thanks to Obama administration connections*, this California‑based solar panel maker had a $535 million spending blowout at the taxpayers’ expense, then fired everybody – some 1,100 jobs.” [emphasis added]

My point was that the entire program was conceived and executed by a Republican Congress and Republican Administration, all that Mr. Obama’s administration did was finish what Mr. Bush’s administration began. It was Mr. Powell who frame this is as a “Tax and Spend Democratic Program Run Wild” while I pointed out it was in fact a “Borrow and Spend Republican Program Run Wild”. Tu quoque? Pas ainsi!

2) You wrote:”The issue is not whether some wonk in the belly of DOE can compute the cash burn rate of a company; it is whether government makes use of that knowledge.”

Mr. Powell wrote:”Perhaps we need to reflect a little on why government hasn’t been able to pick winners.” However, they have. Aside from Solyndra, all of the other participants in this green energy program seem to be doing rather well. These include Ford and Nissan. As far as i can see, 11 out of the 12 projects funded so far are not anything to be embarrassed about (1).

It is worth noting that Solyndra did not get the loan solely through political machinations but they also committed fraud it would seem, at least that is the allegation. It was the current administration who, much to their current chagrin, broke up the fraud.

As you rightly note, had the politicians not gotten themselves involved, the bureaucrats would have gotten this one right too. They would be 11 for 11 instead of 11 for 12 (an unforced error to be sure). So the results would indicate that the *government* can indeed pick winners.

Bush and the Republicans never approved the loan for Solyndra. The responsibility for that blunder falls to Obama and his administration, who did. Its a Democrat’s signature on the loan guarantee.

The Democrats started Fannie Mae in 1938. I certainly would not argue that FDR is responsible for the current mess at that rotten institution because he started it 70 years ago.

Bush brought in a program to pander to certain interests, like any politician. But not everyone qualified for the loan guarantee. Solyndra didn’t get a dime from the Republicans.

But Biden and Obama gave them so much.

#### Vice President Joe Biden, appearing via satellite from Washington D.C., today announced the Department of Energy has finalized a $535 million loan guarantee for Solyndra, Inc., which manufactures innovative cylindrical solar photovoltaic panels that provide clean, renewable energy. The funding will finance construction of the first phase of the company’s new manufacturing facility.

And

“This announcement today is part of the unprecedented investment this Administration is making in renewable energy and exactly what the Recovery Act is all about,” said Vice President Biden. “By investing in the infrastructure and technology of the future, we are not only creating jobs today, but laying the foundation for long-term growth in the 21st-century economy.” ####

I don’t see Biden congratulating Bush and the Republicans for the foresight in bringing in this program.

The Republicans had little control over the program’s budget. They had no control over who received the loan guarantees. And of course it wasn’t Republican party bank accounts that received the kickbacks.

But its got Republican paws all over it, right David?

Still living in your little fantasy: nothing straight comes out of your mouth. Just one pathetic perversion after another.

Wrong! The politicians are VERY adept at picking money makers. Its just that the pick the ones that make money for themselves, through campaign contributions. Check out Tom carnahan’s wind farm, as an example.

Excellent analysis, which I will share with my Economics students. I would add that the free market maximizes total surplus (consumer surplus + producer surplus), and nothing government can do can improve on the result of the free market, unless there is a market failure.

Put another way: in the absence of a market failure, government intervention causes a market to fail.

Do not forget specialization. Industries attract and hold managers, private equity, venture capital and their ilk who all tend to remain in a narrow industry band in order to increase their chances of success.

Part of the Solyndra story is how the government ignored all that advice even from folks who share their ideology.